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After Merkozy: How France and Germany can make Europe work

After Merkozy: How France and Germany can make Europe work

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Once they have forged a new compromise on growth, François Hollande and Angela Merkel should work to restore the eurozone’s cohesion.

The visit of President François Hollande to Berlin points to a willingness for the Franco-German tandem to iron-out policy differences and propose a new compromise on austerity and growth before the EU summit on June 28.

“It will certainly be important for Germany and France to do a joint presentation of their ideas at this Council”, said Chancellor Angela Merkel at a joint press conference during Hollande’s first official visit to Berlin.

In “After Merkozy: How France and Germany can make Europe work”, Ulrike Guérot and Thomas Klau argue that:
A Franco-German compromise on growth is indeed within reach as Hollande has been careful to formulate most of his proposals – boosting the lending capacity of the EIB, activating the EU budget - so that they are acceptable to Berlin.

France and Germany must prepare for the next round of EU treaty reform. The commitment to integrate the fiscal compact into the treaty after a maximum of five years means that the issue will return on the agenda. Berlin wants treaty reform because Germany realises that only stronger eurozone institutions will shield it from the charge of dictating policy to Europe.

The best way to do this is for France and Germany to launch an ambitious reform programme open to other partners. This should make national governments, parliaments and administrations adapt their working methods to the new eurozone macro-economic policy rulebook; facilitate cross-border labour mobility and take first steps towards eurozone Welfare state policies such as a complementary unemployment insurance.
Once they have forged a new compromise on growth, François Hollande and Angela Merkel should work to restore the eurozone’s cohesion.

The visit of President François Hollande to Berlin points to a willingness for the Franco-German tandem to iron-out policy differences and propose a new compromise on austerity and growth before the EU summit on June 28.

“It will certainly be important for Germany and France to do a joint presentation of their ideas at this Council”, said Chancellor Angela Merkel at a joint press conference during Hollande’s first official visit to Berlin.

In “After Merkozy: How France and Germany can make Europe work”, Ulrike Guérot and Thomas Klau argue that:
A Franco-German compromise on growth is indeed within reach as Hollande has been careful to formulate most of his proposals – boosting the lending capacity of the EIB, activating the EU budget - so that they are acceptable to Berlin.

France and Germany must prepare for the next round of EU treaty reform. The commitment to integrate the fiscal compact into the treaty after a maximum of five years means that the issue will return on the agenda. Berlin wants treaty reform because Germany realises that only stronger eurozone institutions will shield it from the charge of dictating policy to Europe.

The best way to do this is for France and Germany to launch an ambitious reform programme open to other partners. This should make national governments, parliaments and administrations adapt their working methods to the new eurozone macro-economic policy rulebook; facilitate cross-border labour mobility and take first steps towards eurozone Welfare state policies such as a complementary unemployment insurance.

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Published by: ECFR, European Council on Foreign Relations on May 17, 2012
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AFTER MERKOZY:HOW FRANCE ANDGERMANY CAN MAKEEUROPE WORK 
Ulrike Guérot and Thomas Klau
 P  OL   I    C  Y   R  I   E   F   S   U  M M A  R  Y  
The rise of the Socialist leader François Hollande to thepowerful presidency of France will transform the politicsof the eurozone and rebalance the European Union’s mostimportant partnership. Both historical evidence and therecent experience of the “Merkozy” era suggest that cross-party constellations in Franco-German relations often work  best for Europe. When the leaders of the two countries startfrom different ideological positions and belong to differentparty political families, it makes it easier for others tocontribute to the debate, mediate and recognise Franco-German deals as their own. When the relationship betweenBerlin and Paris is seen as too symbiotic, on the otherhand, it diminishes the duo’s potential as a laboratory of  beneficent European compromise – precisely the problem with “Merkozy” during the last year.Barring the unforeseen, Hollande will lead France at leastuntil May 2017. Under an extreme scenario for the nextfive years, a severe worsening of the euro crisis could seegovernments and parliaments forced to choose betweenthe rapid creation of powerful federal instruments (such as joint debt liability or a common treasury) and the collapseof the euro. Even without such a dramatic chain of events,however, the economics and politics of the eurozone areset to dominate Hollande’s time in office: his spectacularinauguration-day visit to Berlin demonstrates this vividly.In the short run, the Franco-German tandem will be busy managing the difficult situation resulting from the electionsin Greece, the worsening growth prospects for the eurozone,
 S   U  M M A  R  Y  
The eurozone crisis has shown that the Franco-German tandem remains a vital driver of European integration. The election of FrançoisHollande is good news for the tandem’s capacity to generate constructive compromise in Europe.It will help correct the perception that Germany is the overly dominant partner, althoughFrench influence has been underestimated. Asthe historical evidence shows, the partnership between Berlin and Paris tends to work best forEurope whenever it produces a synthesis betweenpolitically opposed starting positions. This makesit easier for other countries and political forces to buy into Germany’s and France’s proposals fornew European policies.Despite some grandstanding on both sides, theoutline of a new eurozone deal rebalancingausterity with new measures to help growthis already recognisable. Once it is achieved,France and Germany should embark on a work programme to adapt national administrative andpolitical practices to the new European rulebook. Angela Merkel and Hollande should also move tofacilitate cross-border labour mobility in the EUand take steps towards modest eurozone welfarepolicies than can act as automatic financialstabilisers. Finally, Berlin and Paris shouldengage in more consultations with their Europeanpartners. All this will help to create goodwill forthe treaty change that, in the long term, is neededto give the eurozone the leadership it needs.
 
   A   F   T   E   R   M   E   R   K   O   Z   Y  :   H   O   W    F   R   A   N   C   E   A   N   D   G   E   R   M   A   N   Y   C   A   N   M   A   K   E   E   U   R   O   P   E   W   O   R   K
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   E   C   F   R   /   5   6   M  a  y   2   0   1   2  w  w  w .  e  c   f  r .  e  u
and Hollande’s push for new EU and eurozone policies tosustain demand. In the longer term, treaty change is set tomake it back to the top of the EU’s political agenda. It isoften overlooked that a political decision to this effect hasalready been taken: the 25 signatories of the Fiscal Compacthave committed to attempt to integrate it into the EU’sregular treaty after a maximum of five years. With the FiscalCompact scheduled to enter into force by 2013, full-blownEU treaty change will therefore return to the EU’s politicalagenda no later than during the second half of Hollande’smandate.Hollande, in fact, has been careful to formulate his demandsin such a way as to make most of them acceptable to Berlin.The choice of Jean-Marc Ayrault as prime minister, a low-key socialist with an aversion to grandstanding, stronglocal roots and a pragmatic approach to politics, will be welcomed as another positive signal in Berlin. Ayrault, aformer German teacher, speaks German – as does his closestcollaborator, his directeur de cabinet Christophe Chantepy.Given the worsening of growth prospects in the eurozone andthe difficult situation in Spain and Italy, Hollande’s electionshould act as a welcome catalyst for a course correctionin the eurozone’s joint economic policy that would have been necessary anyway such as pushing back nationaltimelines to reach balanced budgets. Chancellor AngelaMerkel signalled even before Hollande’s electoral victory that her government would be ready to do more for growththrough the European Investment Bank (EIB) and the EU budget – provided the ultimate goal enshrined in the FiscalCompact of bringing down public debt and deficits remainsunquestioned. The renewed tension in the financial marketsresulting from the elections in Greece makes it even moreurgent for France and Germany to come to a new agreementreasonably fast. Given sufficient political will, this should beachievable by July, freeing the way for the legal adoption of the Fiscal Compact by 2013.Rebalancing the eurozone’s macroeconomic policy framework is for now; full-blown EU treaty change isa longer-term issue. This brief argues that France andGermany should define and take action on other eurozonepolicy priorities in the intervening years. First, they shouldinitiate a programme of administrative and political reformsto make national and European governmental practicesufficiently compatible to deliver on the new missionsresulting from the reform of EU and eurozone governance.Second, they should launch a work programme to facilitatecross-border job searches and take first steps towards building a small complementary European welfare system.Third, France and Germany should make a sustainedeffort to make their joint leadership more inclusive. All of this would strengthen the eurozone’s political efficiency,improve the EU’s standing with disaffected parts of theelectorate, and boost the chances to secure popular supportfor a new attempt at giving the eurozone and the EU themore forceful and more accountable political leadership itso desperately needs.
 An elective and selective relationship
France and Germany have driven European integrationsince the 1950s. The euro crisis has shown it was false tothink that the EU’s big eastern enlargement would makethe tandem obsolete. Responding to the weakness of theeurozone’s system of governance, Paris and Berlin haveacted as the self-appointed nucleus of the eurozone’s crisismanagement system. “The (European) Commission wastechnically and politically unprepared and therefore unableto take the lead and act swiftly”, said a French official. “Thisis why we had to step in.” Although it was vital for France and Germany to act as anad hoc emergency government in order to contain the crisis,it has not enhanced the duo’s prestige or popularity. Underthe increasingly symbiotic stewardship of former presidentNicolas Sarkozy and Angela Merkel, the Franco-Germancouple has been perceived by many of its partners as divisive,dominant and careless in its casual bypassing of joint EUand eurozone institutions. In many capitals, a grudgingacceptance of the need for Franco-German initiative now goes hand in hand with deep resentment about what is seenas a permanent exclusion from European leadership circles– a situation worsened by the dysfunctional elements of theLisbon Treaty’s new system of European government.In acknowledging the Franco-German tandem’s central role,it matters to take note of an important but rarely mentionedrestriction: in most areas of EU politics, there is no suchthing as a special Franco-German relationship, let alonea joint leadership role. As the year 2011 and the military operation in Libya have amply demonstrated, foreign policy is not an area of regular Franco-German co-ordination, andneither are defence, nuclear policy, trade, environmental,competition and many regulatory issues. The Franco-German engine dominates European institution-buildingand broad macroeconomic issues. Because the euro crisisdominates European politics today and because it is playingout in precisely these two policy fields, it feeds the mistakenimpression that France and Germany are able, or aiming,to leave their joint mark across the whole range of coreEuropean policy. A closer look reveals a further layer of complexity. Even oneconomic issues, Paris is not Berlin’s first port of call. “Weknow that we normally want things which are very differentfrom what the French want”, said a German official dealing with financial policy. “The real brainstorming, reflecting ongood ideas, thinking about how to make the Fiscal Treaty  work and how to build a system of fiscal control, that we do with the Finns and the Dutch first. These are the partners we really share an approach with. We call the French only once we have established a common position among ourgroup of like-minded countries. And we know that once we start speaking with the French, then the trouble starts.”The discreet operational alliance between the German andthe even more hawkish Dutch finance ministry goes back decades. France was never Germany’s closest partner in
 
3
1
2011 CIA World Factbook 2011, available at https://www.cia.gov/library/publications/the-world-factbook/elds/2012.html
Europe. Rather, it is the partner with whom achieving acompromise has the greatest overall impact on EU policy.
Imbalances hurt
The euro crisis has reaffirmed the relevance of the Franco-German tandem and changed its internal dynamics. Theseare now harder to read and more difficult to manage.For decades, there was what Stanley Hoffmann calledthe “symmetry of asymmetry” between a France that wasperceived to lead in political terms and a West Germany that was stronger in the economic sphere, which worked asa stabilising feature of the duo. In reality, Germany shapedthe EU politically at least as much as France, and Frencheconomic growth averages often matched and occasionally outperformed Germany’s. But the sense of balance that arosefrom a politically confident France and an economically confident Germany helped the couple through numerouspower battles.Even more than German reunification, the Treaty of Nicedealt a first big blow to this equilibrium by ending the mostpowerful expression of institutional equality between thetwo, namely their similar share of votes in EU Councilformations. Since then, an increasing divergence of economic performance has reinforced a sense of growingdisparity. Germany, having reformed its welfare state andlabour laws and overcome the long crisis resulting fromintegrating the bankrupt GDR, has strengthened its primacy as the EU’s most successful big economy. France, of course,is not a weak power: as a military nation ready to engageoverseas and a veto-wielding member of the United NationsSecurity Council, it has preserved global stature. Moreover,thanks to the shrewd eurozone crisis management of Sarkozy, France managed to escape the Italian and Spanishcontagion scenarios and the downward economic spiral thatensued for these countries. Yet a rapid shrinking of France’s industrial fabric,accelerated by the rise in the euro’s external exchangerate, has fed a sense of anxiety and dispossession, withglobalisation publicly debated as a threat rather than asan opportunity. Germany, whose industrial base is ideally structured to meet the demand of countries such as China,still produces close to 30 percent of its GDP in the industrialsector, whereas the figure for France has dwindled to lessthan 20 percent.
1
France lacks small and medium-sizedenterprises able to compete on a global scale; Germany hasroughly a thousand of them. They deliver wealth to ruralareas and act as economic and entrepreneurial educators forthe population, showing that global entrepreneurial successis achievable even for small companies located in rural partsof the country.In France, hardly a week goes by without reports of yetanother closure of a factory or company. Unsurprisingly, when French interlocutors are asked about the prospectsfor their country’s relationship with Germany, the fear of 
décrochage
(economic decoupling) is a recurrent theme.
2
 The only structural economic factor bolstering French self-confidence when the country looks across the Rhine is itsmuch healthier demography. But this does little to counterthe prevailing sense of angst in France. The French havethe feeling that they are “no longer on the same eye-level asthe Germans”, a French observer said.The euro crisis has exacerbated the sense of fragility. Franceobjectively faces a far greater risk than Germany that themarkets will lose confidence in its ability to refinance itsdebt. This reduces France’s room for manoeuvre andmakes it imperative to French policymakers to sustain theperception that they form part of a bloc with Germany ratherthan with Italy or Spain. The political consequences forFrance are real, but the tendency in Europe and in Franceitself has been to overstate them to the point of distortion.There is a widespread perception that until the election of François Hollande, Germany alone has called all the shotsin the crisis, forcing France and others to subscribe to theGerman vision of how to manage the eurozone.
3
But this isnot how things are seen in Berlin.The fact is that Germany has seen several of its sacredcows led to the ideological abattoir during this crisis;
 Bild 
 (Germany’s best-selling tabloid) stirred up popular emotion whenever another such sacrifice became inevitable. Forexample, the creation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism(ESM) amounted to an implicit recognition that financialsolidarity for debt-laden countries under massive pressurefrom the financial markets must be a permanent featureof Europe’s monetary union – a de facto breach of the“no bailout” principle enshrined in the EU treaties atGermany’s insistence. The self-reinvention of the ECB asa guardian of financial stability, expanding its mandate tosave banks from collapse and facilitate the refinancing of otherwise bankrupt states, was another blow to Germany’spsyche – and a move seen by many citizens as a further betrayal of the promises made when the euro replaced thedeutschmark in 1999: most Germans want their central bank to focus on fighting inflation.More recently, statements by Bundesbank President Jens Weidmann and Finance Minister Wolfgang Schäuble thatGermany must accept a little higher inflation to balance theEuropean South’s loss of competitiveness dealt yet another
2
The authors interviewed more than a dozen leading politicians, civil servants, mediarepresentatives and researchers in France and in Germany for this paper.
3
See, for example, Ifop, “L’image de l’Allemagne en France”, no. 19787, January 2012;Gerrit Wiesmann and Ralph Atkins, “Schäuble ready to tolerate German ination”,
 Financial Times
, 10 March 2012, available at http://www.ft.com/cms/s/0/49e9e708-9abe-11e1-94d7-00144feabdc0.html#axzz1usPB7eor (accessed 15 May 2012).

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